Medical school can easily run a candidate anywhere from $40,000 – $60,000 per year. If that number seems jarring to you, the silver lining is that medical practitioners tend to be among the highest earners which then, hopefully, will offset school spending.
Still, given education’s steep price, when medical professionals graduate, many do so with serious amounts of debt. That can create a lot of problems when it comes to investing in a home.
Enter physician loans.
Physician loans are a special type of mortgage arrangement that doctors make with lenders. These loans help them get into properties more seamlessly.
To learn more about physician loans and if getting one might be the right call for you, keep reading to discover definitions, advantages, and drawbacks.
Defining a Physician Loan
Put simply, a physician loan is a mortgage product that some lenders offer to MDs. These loans take into account that most doctors just out of school have a very poor income to debt ratio.
That’s because they’re on the starting end of their medical pay-scale while also being hundreds of thousands of dollars in debt.
Under normal circumstances, a poor income to debt ratio would disqualify people from buying a home. Given that doctors are generally seen as stable borrowers, these loan products exist to extend to them an olive branch and help them put down roots faster than they normally would be able to.
Why Get a Physician Loan?
We’ve made clear that physician loans sport some advantages. But what are those advantages exactly?
Here are a handful of pros that you’ll find in most of these loan products:
Ignored Debt
As we noted, if you have high debt, that’ll be brushed aside when getting a physician loan. High debt is expected with loan applicants.
Granted, if your debt is astronomically high (out of line with the average graduating student) there’s nothing prohibiting lenders from denying your candidacy..
No Down Payment
In addition to ignoring debt, physician loans may ignore the need for a down payment. That means you won’t have to have any money in savings to get into the house you’re looking to buy.
Compare that to the 3.5% to 20% the average borrower will have to put down and you can see how that’s a great deal.
No PMI
When you don’t put 20% down on a house, the vast majority of lenders will have you pay for what’s called private mortgage insurance (PMI). Private mortgage insurance is a monthly expense that protects lenders from you living in a house you own very little of, destroying it, and taking off.
PMI costs are contingent on the value of a home and can cost hundreds of dollars per month. Given lender’s faith in medical professionals that they won’t buy and dash on their properties, PMI is often waived which means huge savings.
Better Ways to Invest Your Money
By not having to put a down payment on your house, you get to keep more of your assets liquid. That additional liquidity in your financial portfolio enables you to put money into other investment vehicles which will earn you more.
For example, by not having to drop $60,000 on a down payment, you might put that money into an interest-bearing CD which would net you 2.5% in returns annually. That’s $1,500 per year!
What Are Physician Loan Drawbacks?
As with all things in life, there are drawbacks to going with a mortgage for doctors. Granted, the positives largely outweigh the negatives.
In an effort to give you all of the information you need to make an informed decision, here are negatives to note:
Physician Loans Tend to Carry Variable Interest Rates
A fixed-rate mortgage charges an average interest rate that’ll never change over the life of your loan. That’s good if you want to be able to plan, long-term, your housing expenses.
Variable-rate loans are slightly lower than fixed-rate loans but will change based on external economic factors. That may mean having to pay a whole lot more than you anticipate paying a few years after you take on your loan.
As it stands, most physician loans we’ve seen offer variable rates. That might make you uncomfortable given the uncertainly.
Interest Rates Are Higher
Not only are physician loans generally sporting variable rates but those variable rates are oftentimes higher than the variable rates you’d see on standard loans. These higher prices are a convenience fee of sorts lenders will try to work into deals in hopes of making their loan more profitable.
Note that interest rates will vary from lender to lender so if you’re dissatisfied by what you’re seeing, feel free to shop around.
You May Go Underwater on Your Home
Being underwater on your home means you’ve lost money on your investment based on what you have in the property versus its market value. With no down-payment, if your property devalues by even 1%, you’ll have negative equity.
That’s not a big deal if you plan on holding onto your house for a long time but it’s something to be aware of.
Physician Loans Are Worth Exploring If You Qualify
We’ve shared with you the pros and cons regarding physician loans. Our take is that, despite some of the loan’s drawbacks, they make sense for doctors, certainly to the extent that they’re at least worth exploring.
We hope you’re able to get into the house you’re looking at, whether that be with the help of loans for medical professionals or any other type of loan. If you find yourself in need of more help while on that journey, explore additional home loan content here on our blog.
